Introduction to Accounting and Business

Chapyer 9 | BAINTE1l

Inventory System
Chap 9 | Merchandising → One current asset account called
→ A merchandiser is one who buys and Merchandise Inventory fou
sells goods or merchandise. The stock _nd only in the merchandiser's report.
of goods which it buys and sells is → Merchandise inventory refers to goods
called Merchandise Inventory. purchased for resale in the normal
→ The service provider uses the title course of business.
Service Fees Revenue for receipts → If still on hand at the end of the
coming from clients accounting period (one year normally)
→ merchandiser uses the title Sales this is presented in the statement of
Revenue for receipts coming from financial position.
goods sold to customers. → If sold, cost of goods sold is presented
→ is sold the cost/expense of the in the income statement.
merchandise is recognized as cost of
goods sold or Cost of Sales 2 WAYS OF RECORDING
→ The Gross profit can be calculated as MERCHANDISE INVENTORY
the difference between the total sales 1 Perpetual Method
revenue and the total cost of sales → Records merchandise movement
→ Operating expenses are expense are continuously, showing real-time
necessary to support the operation of inventory balance.
the business → Debits goods purchased to
Merchandise Inventory and credits
when sold.
→ Generates two entries for each sale:
1) for sales revenue and 2) for cost
NON OPERATING ACTIVITIES of sales.
→ minor income and expenses not → Typically used by businesses selling
recurring and not part of regular high-price, low-volume items like
operation and is deducted from cars and appliances.
operating profit to arrive at net → Offers better stock control through
profit. continuous monitoring.
1 Other Revenues and Gains like rent → Enables easy verification of
income, interest income, and gain inventory balance through regular
from sale of land. inventory counts.
2 Other Expenses and Losses like → An example of internal control in
interest expense and loss from sale Accounting Information Systems
of equipment. (AIS)

Jhehanna Yosoya | Act 235

 Introduction to Accounting and Business
Chapyer 9 | BAINTE1l

2 Periodic Method Inventory Sheet

→ No detailed or continuous recording → The count is usually supervised by the
of goods in this method. staff of the Internal Auditor who affixes
→ Inventory balance cannot be signature on inventory count sheet to
determined at any point in time. confirm the count that was made.
→ Goods purchased are recorded by Periodic Method
debiting a Purchases account,
assume that during the year total
immediately considered as cost of
purchases amounted to P50,000
sales.
representing 200 chairs bought at
→ Sales Revenue is recorded without a
P250 each. At the end of the year, a
corresponding cost of goods sold
physical count showed 70 chairs still on
when goods are sold.
hand. Cost of sales is computed as
→ Correct cost of goods sold is
follows:
determined periodically, usually at
Purchases
the end of the accounting period,
(200 x P250) P 50,000
through a physical count of unsold
Less Ending Inventory,
goods.
(70 x P250) 17,500
→ The Periodic Method is used by
Cost of Goods Sold P 32,500
businesses selling low-price, high-
(130 x P250)
volume goods (e.g., hardware
stores, supermarkets) where
tracking individual cost prices for How much is the sales revenue? If the
each sale is impractical. merchandise was sold at 50% above
→ Bar codes and electronic scanners cost or mark-up of P125.00 then sales
could enable the use of the price will be (P250+ P125) P375.00.
perpetual method for more efficient Gross profit will be computed as
tracking. follows:

Inventory Count Sales

→ Inventory count is a crucial internal (130 x P375.00) P 48,750
control measure. Cost of Sales
→ It's necessary for both the perpetual (130 x P250.00) 32,500
and periodic inventory methods. Gross Income on Sales P 16,250
→ A record of closing stock is compiled on (130 xP125)
an Inventory Sheet.
→ The physical count is supervised by the
Internal Auditor's staff.
→ The Internal Auditor's staff signs the
inventory count sheet to confirm the
accuracy of the count.

Jhehanna Yosoya | Act 235

 Introduction to Accounting and Business
Chapyer 9 | BAINTE1l

Recorded using Perpetual Method Merchandise Inventory, Jan. 1

Merchandise Inventory 50,000 (70 at P250) P 17,500
Cash 50,000 Add: Purchases (100 x P250) 25,000
To record purchases Total Goods Available for Sale 42,500
Cash 48,750 (170 at P250)
Sales 48,750 Less: Ending Inventory Dec 31 12,500
To record Sales (50 x P250)
Cost of Sales 32,500 Cost of Sales (120 x P250) P 30,000
Merchandise Inventory 32,500
To record cost of sales Sales for the 120 chairs at P375 per chair
Recorded using Periodic Method will result to a total gross profit of P15,000:
Purchases 50,000 Sales (120 x P375) P 45,000
Cash 50,000 Less: Cost of Sales (120 x P250) 30,000
To record purchases Gross Profit (120 x P125) P 15.000
Cash 48,750
Sales 48,750 Stock Cards
To record Sales → help track how much paid for the
items to figure out how much those
No Cost of sles entry goods cost to calculate its profit
correctly
End of month or year: Fifo costing method
Merchandise Inventory 17,500
→ Follow the natural flow of goods from
Purchases 17,500
the oldest bought to the latest. Since
To record unsold goods
7,000 books were sold out of the
10,000 books purchased, the first
Continuation 4,000 will be based on the first cost
price of P150 and the 3,000
To continue with the illustration, the additional books sold based on P175.
merchandise inventory of 70 chairs on Cost d Sales is P1,125,000. Inventory
hand last year will be brought forward end will be based on the latest prices:
as merchandise inventory beginning 2,000 based on P180 an 1,000 based
this year. Another 100 chairs are again on P175 or a total of P535,000.
purchased bringing the total units Moving average costing method
available for sale to 170. At the end of → if several purchases wer made before
the year, if 50 chairs are still on hand, a sale took place, average the cost of
cost of goods sold for 120 chairs will the purchases and use this to get the
amount to P30,000 computed as cost goods sold:
follows:

Jhehanna Yosoya | Act 235

 Introduction to Accounting and Business
Chapyer 9 | BAINTE1l

Moving Average costing method

(2) Cash Discounts
→ The usual credit terms which
appear on the invoices
→ to encourage a customer to pay
immediately, speed up the seller's
cash inflow and allow him to use the
cash for another profitable
operating cycle.
To illustrate:
Sales Revenue How a cash discount is recorded let us
assume that on March 1 Royal Furniture
Gross sales
sold goods to Jim Perez for P6,000 with a
→ Sales revenue is earned when the
P2,000 down payment and the balance
merchandiser transfers the goods
on term of 2/10, n/30. The customer paid
to the customer. The sale is
on March 8. Entries in the books of Royal
supported by a source document
Furniture will appear, thus:
called an Invoice. Two copies are
usually prepared by the seller, the
original of which is given to the
buyer who uses it in recording
purchases and the duplicate is kept
on file by the seller who uses it in
recording sales.

Sales Discount
(1) Trade Discounts
Under the Perpetual Method, cost of sales
→ Percentage reduction from a
should be recorded.
published list price may be granted
to retailers or wholesalers for
→ The cash discount otherwise known as
buying large quantities of goods
sales discount is a contra account
→ immediately deducted from the list which is recorded on the debit side.
price and only the net amount This reduces the recorded revenue or
called gross invoice price will be the sales
basis for invoicing and recording → the trade discount which is granted at
the date of sale is immediately
deducted and therefore not recorded
anymore.

Jhehanna Yosoya | Act 235

 Introduction to Accounting and Business
Chapyer 9 | BAINTE1l

To illustrate:
assume that Perez paid P2,000 on March 8 Assume that Royal Furniture sold for cash,
and the balance on March 10. If the policy of to Asia Miguel, merchandise worth
the company is to grant discounts only P15,000. One week after, Asia Miguel
when the account is fully paid, the entries returned goods worth P4,500 because the
will appear as follow: goods were not as ordered. Royal Furniture
acknowledged the return and issued a
check to refund the customer.

→ If the customer bought the goods on

If the company grants discount on partial account, a credit memorandum will be
payments, then the entries on March 8 and issued by the seller to acknowledge the
March 10 will change as follows: return. If it is the buyer who issues the
document, instead of the seller, it is
called a debit memo
Credit Card Sales
→ Customers may use credit cards to
purchase goods. Merchandisers
encourage the use of credit cards for the
following reasons:
Returns and Allowances a) credit card companies and banks pay
→ A customer may return merchandise if more quickly,
it is defective or damaged or if it is not b) the merchandiser does not recognize
as ordered. the customer may request bad accounts
a reduction or allowance in the price, c) expenses are avoided
for the same reasons. Like discounts, Entries:
returns and allowances should be Cash in Bank xx
debited since the amount to be paid Credit Card Discounts xx
by the customer will decrease revenue. Sales xx
Sales returns and allowances is a → A discount on credit card is a selling
contra revenue account. expense. Others treat this as a deduction
→ Perpetual Method: : debit from sales. Accounts receivable is for the
merchandise inventory and credit cost account of the credit company.
of sales

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 Introduction to Accounting and Business
Chapyer 9 | BAINTE1l

Net Sales
→ At the end of the accounting period Freight Out
several accounts are deducted from → FOB Destination (Freight prepaid) -
gross sales to arrive at the net sales The seller should pay for the freight
revenue (selling expense)

Gross Purchases
→ Under the periodic inventory system, a
merchandiser uses the title Purchases Other Maritime Terms
whenever merchandise is bought for → CIF - (cost, insurance and freight) must
resale. It represents a decrease in be paid by the buyer; seller pays for
owner's equity account for cost of loading cost.
goods expense → FAS – (free alongside) means seller
→ Recall that in the Perpetual Method pays expenses to deliver the goods
this is debited to Merchandise alongside the carrier but buyer pays
Inventory for loading and shipping costs.
Freight In Purchase Returns and
→ If the term of shipment is FOB
Allowances
Shipping Point (Freight collet), the
→ Goods purchased may be returned
buyer as owner of the goods, should
due to defects, damage, or incorrect
pay for the freight.
orders, or the buyer may request a
→ Aside from Purchases, the buyer
price reduction.
debits Transportation In or Freight In.
→ This action reduces both the cost of
This is then added to Purchases to
purchases and the liability to be paid.
arrive at Gross Purchases
→ To decrease purchases, a contra
→ FOB Shipping Point Freight Prepaid?
account called Purchase Returns and
seller advanced the freight, the buyer
Allowances is credited with a
must pay for the freight.
corresponding debit to accounts
payable if it was purchased on credit.
→ Excessive returns because of defects
on goods purchased may mean, for
example, that management should
look for other suppliers.

Jhehanna Yosoya | Act 235

 Introduction to Accounting and Business
Chapyer 9 | BAINTE1l

→ Under the Perpetual Method, returns,

allowances and discounts are directly
credited to the Merchandise
Inventory account since these
represent a reduction on the cost of the
buyer's goods..
→ Using the preceding illustration assume
that when the P50,000 goods bought
on account were received, P5,000
were found defective and were
returned. The journal entries of the
buyer will be:

Purchase Discounts
→ A trade discount given to the buyer is Operating Expense
immediately deducted from the list → Operating expenses are classified into
price and only the balance appears in two: selling and administrative.
the invoice. → Selling or distribution expenses are
→ Granted and recorded only when the those incurred in storing, promoting,
account is paid within the discount packaging, and delivering the
period. merchandise such as Freight Out, Sales
→ A discount is recorded by debiting the Salaries, Advertising, Sales Commission,
liability and crediting the contra and Depreciation Expense
purchases account called Purchase → General or administrative expenses
Discount. The effect is a decrease in the consist of expenses needed in the
liability to be paid by the buyer which general administration of the office
in turn decreases the value of the other than the store such as Bad Debts
merchandise purchased. Expense, Office Supplies Expense, Office
Salaries, Utilities Expense,
→ If the business has only a small office to
administer to its needs, the operating
expenses need not be classified into
selling and administrative expenses.

Jhehanna Yosoya | Act 235

 Introduction to Accounting and Business
Chapyer 9 | BAINTE1l

Example: Cheska buys online goods

from Barn. The sales order was approved
for a set of dresses amounting to $1,500.
Cheska paid and deposited this to the
account of Barn when the exchange rate
was P43 to a US dollar on March 31. The
shipment was received on May 1. Cheska
makes the following entries:
3/31
Advances to Supplier 64,500
Cash in Bank 64,500
5/1
Purchases 64,500
Advances to Supplier 64,500

Owner’s Withdrawal of
Merchandise
Owner’s Drawing xx
O Purchases xx

Value Added Tax

→ VAT is a 12% tax imposed on certain
providers of goods and services when
their annual gross sales or receipts
reach P3,000,000 or more, as
mandated by the TRAIN Act effective
since January 2018.
→ VAT impacts both sellers of goods and
providers of services, including
practitioners (lawyers, doctors),
lessors, hotels, restaurants, movie
Imported Goods theaters,, etc.
→ Imports and exports are part of
international trading. Window
shopping is possible just by using the
internet thru e-commerce. Ordering
the goods is easy, the complicated part
is the payment. Exporters may require
importer to advance the payment.

Jhehanna Yosoya | Act 235

 Introduction to Accounting and Business
Chapyer 9 | BAINTE1l

Input Tax (Debit) To illustrate, assume Alonzo Shoe Emporium,

a vat-registered company, bought goods on
→ Each time a purchase is made
account for P22,400 from Marikina Shoe
and a 12% VAT is included, the
Store which is also a vat-registered
buyer pays two items- cost of
company. A few days after, Alonzo sold the
the merchandise purchased
goods to cash customers for P33,600.
and the tax.
Remember that the invoices are VAT
→ Aside from Purchases (or any
inclusive.
asse bought), an Input Tax
account should also be
debited.
→ Input Tax may be shifted to the
customer as explained in the
Output Tax discussed below.
Output Tax (Credit)
→ VAT-registered businesses
charge a 12% VAT on each sale
of goods or services,
increasing the total amount
collected, which is credited to
the Output Tax account. → On July 1, Alonzo paid P2,400 for
→ Input Tax and Output Tax purchases with VAT, and on July 10,
accounts are reconciled he passed on an additional VAT of
monthly, resulting in either a P3,600 to the customer, ultimately
Tax Payable when Output Tax recovering his initial payment and
exceeds Input Tax or a having an excess of P1,200 to remit to
Deferred Tax account when the BIR.
Input Tax is greater than → If Input Tax exceeds Output Tax, the
Output Tax. difference is debited to an asset
account called Deferred Tax, which
→ Value Added Tax is payable monthly can be applied to future output taxes
but filed quarterly within 25 days at the or other tax liabilities. Starting in 2023,
end of each quarter. Businesses or the new law mandates quarterly VAT
practitioners who are VAT registered payments instead of monthly.
must prominently show the inclusion of
the 12% tax in the invoice price. If, for
example, restaurant menus display
prices of food where VAT is not
included, it should place after the sales
price: plus 12% VAT.

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